Editorial: Instead of EMs, state should help cities stay out of financial trouble

Dec. 8, 2013

Written by

The Detroit Free Press Editorial Board

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Putting a bandage on a bleeding wound is a great plan, but it’s a better idea not to get hurt in the first place.

The wound-and-bandage approach is exactly how the State of Michigan handles struggling cities.

The state’s emergency manager law comes into play only after a city or school district is in deep financial distress, after a decline in revenue, residents, value, resources — everything the city or school district needs to survive.

And that’s why the EM law isn’t enough.

An increasing number of cities are under emergency management, under review and facing the prospect of an EM appointment, or operating under a consent agreement — 12, at last count. While that’s a small fraction of the total number of communities in the state, local-government watchers say that number will increase, and cities themselves report uncertainty about the future.

The point of the revamped EM laws — first Public Act 4, then P.A. 436 — was to give the state more tools to intervene early and stave off disaster. But what’s become increasingly clear is that there’s something more fundamentally wrong with the way Michigan finances and supports its local governments.

So it’s time for Gov. Rick Snyder and the Michigan Legislature to start thinking about ways to stop cities and school districts from reaching the fiscal point of no return. It’s time to develop a long-term strategy for local governance that confronts the bigger-picture problems affecting cities and proposes more lasting solutions.

Detroit woes not unique

Detroit is the largest city in the state in which an emergency manager has been appointed, and the largest city in U.S. history to enter municipal bankruptcy. While Detroit’s problems are big, they’re not unique. Cities across the state are struggling to meet legacy costs, such as retiree health care and pension payments, even cities that haven’t lost an unhealthy chunk of their residents.

A report by Michigan State University professor Eric Scorsone, based on 2011 audit data, found that on average, cities statewide are putting aside just 12% of the money needed to fund long-term retiree health care. Pensions are in better shape, on average funded at 76%, but that’s still below the 80% that the state considers adequate.

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About 29% of cities across the state reported that they were in continued fiscal decline, according to a spring survey by the University of Michigan’s Center for Local, State and Urban Policy. About 30% reported having an increasingly harder time meeting their financial obligations. That’s an improvement over last year’s numbers, but it’s important to realize that 30% of Michigan cities means about 540 communities.

Why are so many Michigan cities in, or headed toward, deep distress? The answers, it turns out, aren’t that complicated.

“You can get into a lot of nuance, but the specific, simple story is, we have really restrictive tax limits,” Scorsone said. “That, combined with a set of spending pressures driven by labor policy and other things ... obviously, when you put those two together, it’s not a good match. You create a structural deficit by your very nature. Some communities, because of wealth or better management, can manage it more easily, but everybody’s on the same train wreck. It’s just a question of where you are on the train.”

The limits Scorsone is referring to are on property taxes. Because Michigan caps the amount by which taxes can increase each year, and because property value dropped so precipitously during the recession, it’s incredibly difficult for cities to make up lost revenue, even if property values are rising. In Wayne County, for example, county officials say local governments won’t see tax revenue grow to 2009 levels until at least 2025.

The state recently eliminated the personal property tax on business and industrial equipment, an important source of revenue for a lot of cities. Add in state cuts to revenue-sharing — replaced in 2011 with the Economic Vitality Incentive Program, a smaller pot of available revenue, with a provision of allowing cities to compete for additional funds through adopting operational efficiencies — which has dropped by 34%, or more than $5 billion, in the last decade, and it’s easy to see why experts like Scorsone say the municipal funding system is broken.

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The state’s bevy of emergency managers can clean up a balance sheet, cut services, propose tax increases, or change how the government works, but no emergency manager can solve the problems, normally decades in the making, that lead to financial distress.

“It seems state government has watched as local revenues were decimated, and the response has been to impose PA 436 as a form of discipline to force local officials to make hard cuts,” said Bettie Buss, a former policy analyst for the nonpartisan Citizens Research Council of Michigan.

“It seems like the tough-parent approach to take away the resources while tightening the discipline.”

So let’s stop doing it this way.

A better strategy

The research Scorsone does consistently shows that pensions and retiree health care costs are the biggest challenges for any Michigan city, and that’s confirmed by finance directors, mayors, county executives, city managers and emergency managers from Allen Park to Northville to Macomb County to Wayne County.

Counties or cities that are financially stable have options. In 2007, Oakland County issued debt to pay its pension obligations, closing its defined-benefit plan and switching to a defined-contribution plan. A state law passed last year offers the same option to other governments, but only those with investment-grade bond ratings. The cities in the worst trouble can’t bond for these liabilities.

There’s no doubt that the number of communities in the state — 83 counties, 1,240 townships and 535 cities and villages — and the duplicative functions performed by each, are also a drain on resources. The state has tried to encourage consolidation or service-sharing by offering more revenue to cities that share services through its EVIP program, but it hasn’t had widespread success. Some have successfully merged background functions, like police dispatch. Few local leaders have pursued truly regional approaches to city services that lead to the efficiencies municipalities need, perhaps driven by strong resistance from residents to outright consolidation.

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But handling the problem community by community just doesn’t work, Scorsone says.

“You have to have statewide reform,” he said. Otherwise, “it will take too long, and some communities just don’t get there.”

A prescriptive set of changes that really addresses the financial struggles that cities are experiencing might include tax increases, or at least reductions in how Proposal A limits property tax collection, Scorsone said: “It can’t only be spending, it has to be some revenue, as well. Then I think you move toward getting everybody under one state pension system, like other states have. Our pension governance is pretty bad. It’s rife with problems.”

Moving pension systems to state oversight would be a tough political sell — but communities might accept such a change more readily if the state offered financial backing for unfunded liabilities.

“Some centralization of management of those systems could certainly take the political pressure off the pension boards, and possibly improve the returns and improve the valuation of assets so communities would have some idea what the real funding of the assets are,” Buss said.

But another problem is that state Treasury staff — the folks charged with financial oversight of cities — has been cut in recent years, despite an overall growth in state government employment.

“Other states do a better job of prevention, and do a job of reviewing (local government) finances more systematically,” Scorsone said. “The State of North Carolina looks at every debt issuance and carefully reviews it. We used to do that here but we don’t anymore. We need more auditors, and more tax options, more tax flexibility.”

It’s a straightforward, yet comprehensive, set of solutions: Change the way cities can generate revenue by offering more tax flexibility, provide more rigorous oversight at the state level — the kind that can stop a city from falling off a fiscal cliff — and for cities that are struggling to meet legacy costs, offer assistance in the form of bond backing and a switch to a centralized pension system.

Thus far, an emergency manager’s ability to stop the bleeding is largely theoretical. Whether an EM can truly put a city or school district on the path to long-term stability is largely unproven — just look at the number of cities with an emergency manager or consent agreement in place for the second time. Until state leaders accept, and embrace, the need for real reform, emergency managers will continue to be the only option for Michigan’s struggling cities.